Council Puts New Income Tax Proposal on August Ballot

Above: Council Members Shanna Draheim, Mayor Mark Meadows, and Ruth Beier at tonight's meeting.

East Lansing’s City Council voted unanimously tonight to put an income tax on the August 7 ballot in the hopes voters will pass this measure and help the City deal better with its major financial problems, including what the City’s Finance Director has termed its “staggering” pension debt.

If passed by a majority of East Lansing voters, the ballot measure would amend the City Charter by creating an income tax limited to twelve years (2019-2030). The ballot measure is written such that 60% of the revenue obtained after administrative costs would go to making supplemental payments for the City’s unfunded pension liabilities, 20% to police and fire protection, and 20% to the maintenance and improvement of streets and sidewalks, water and sewer systems, parks, recreation, and City-owned facilities.

The measure would tax residents’ income at 1% and non-residents’ income at 0.5%. (State law determines which types of income may be taxed, and requires that non-residents pay no more than half of what residents pay.) If passed, the income tax would come with an automatic property tax reduction in order to reduce the financial impact on East Lansing property owners. The automatic reduction, which was adopted by East Lansing voters last November, would, in effect, decrease the millage rate by about 5 mills.

While the vote was ultimately unanimous in favor of this ballot proposal, Council Members did disagree on a number of points before getting to the final decision.

Council Members Shanna Draheim and Aaron Stephens wanted the vote to be on the November ballot in order to allow more time to educate citizens as to why they should vote “yes.” But Mayor Mark Meadows, Mayor Pro Tem Erik Altmann, and Council Member Ruth Beier wanted it in August partly because that is what data from the recent poll paid for by the City was based on, and partly because, if it passed in August, that would leave more time for figuring out what to do with potential budget cuts in the coming year and arranging for administration of the new tax.

In a major point of disagreement, Altmann (above, left) called for a clear statement from the City Manager about what residents will be facing if the vote goes “yes” versus “no” – what to expect in terms of police and fire staffing, road improvements, and so on. On this point, Altmann was specifically supported by Draheim, Beier, and Stephens.

Meadows said that while he was interested in information from the City Manager about what proposed cuts might be undone if the income tax passes, that he was not interested in having those specifics laid out before the vote. Each of the other four Council Members disagreed with him on this point, saying it was important to bring to the voters a maximally clear vision of what a “yes” and “no” vote would mean for people who live in East Lansing.

It appeared likely that the Council will continue this discussion about prospects of future budget cuts with or without new tax revenue. The Council will vote on the Fiscal Year 2019 budget next Tuesday, May 22 at 7:00 p.m., at which time the budget through June 2020, including cuts, will be finalized.

There were also points on which Council Members agreed, including that significant budget cuts are still going to have to happen even if this measure passes. That’s because the City is facing increasingly large obligatory payments into the pension system. Said Draheim, “There are [going to be] some permanent changes in the way we operate our services and we need to be very honest about that.”

Draheim said she wants to be clear that even if the income tax passes, some possibly unpopular cuts will still go through, an example being cuts to social services. Written communications to Council this week included many people asking that Council revise its plan to City funding to Haven House, but Draheim has made clear she thinks that kind of funding must now be understood as a thing of the past. Stephens (below, right) called the cuts that were inevitable “hard choices.”

Council Members also were in agreement that the income tax was a fiscally prudent new-revenue-producing option in that it did not create the relative uncertainty and debt that bonding would. They also felt that an income tax is most “fair” because it taxes not only residents but non-resident workers who come to East Lansing and consume City services like emergency services, roads, water and sewer services, and the like.

The great majority of non-resident income tax would come from MSU employees. Draheim addressed this specifically, calling MSU an “anchor institution” that does not generate property tax. She said MSU is not like “a major company that might pick up stakes and move to China, so an income tax is an equitable and fair way to spread the significant financial burden.”

Meadows said that he thinks there is “most certainly” no chance of MSU offering to provide large payments to East Lansing to help with emergency services in lieu of the income tax. In the last election cycle, Meadows and MSU’s then-President Lou Anna Simon discussed that possibility, but the deal was ultimately not approved by MSU’s Board of Trustees, and now MSU itself is facing great financial uncertainty in the wake of the Larry Nassar sex abuse scandal.

Before Council got to the issue of what to put on the ballot, Beier (below, right) took a few minutes for what she called her “continuing tutorial on budget and pensions.” She sought to explain where the financial crisis has come from, noting that it arose partly from the problem of MERS, which administers the City’s pension system, wrongly estimating rates of return.

That said, she noted that “the biggest problem is revenue.” In 2006, the City’s General Fund budget was about $34 million, and over a decade later, it is still at that level, even though inflation has been about 25%. That’s because a pair of State laws (Proposal A and the Headlee Amendment) limit property taxes from keeping up with inflation and also because the State has cut way back on revenue-sharing with cities, leaving cities all over Michigan in dire straits.

Beier pointed out that if the City’s General Fund had been keeping up with inflation since 2006, the City would have had $60 million more in revenue, which would bring the City’s pension funding rate from about 50% to about 85%. That would drastically reduce the burden the pension liability is now putting on the City’s budget.

Beier said she would “love” to institute a local sales tax on things like beer, retail sales, or marijuana, but noted that State law prohibits local sales taxes. So, she said, property taxes and an income tax were the only viable options for major new revenue.

Council put an income tax proposal to the voters last November, and that measure failed to pass by about 400 votes, with 53% voting “no” and 47% “yes.” In that case, the income tax had no time limit and did not specify what the new revenue would be used for. Council is hoping that this time, with more clarity about the financial problems and options, plus specific limits as noted above built into the tax proposal, East Lansing voters will tip in favor of the income tax.